Tag: Limitations

  • Management Accounting of Functions, Advantages, and Limitations

    Management Accounting of Functions, Advantages, and Limitations

    The meaning of management accounting is Presentation of accounting information is to assist in the management of management accounting policy creation and to help in the day-to-day operation of an undertaking. Management Accounting of Functions, Advantages, and Limitations. Thus, it is related to the use of aggregated accounting data with the help of financial accounting and cost accounting with the objective of planning, planning, controlling and decision making by the management. Management accounting link management with accounting is the subject of management accounting as any accounting information required to make managerial decisions. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Better Explanation of Management Accounting of Functions, Advantages, and Limitations. With Meaning and Definition.

    Management Accountancy is a composite mix together in all aspects of complete, financial accounting, cost accountancy, and financial management. This crystal becomes clear that management presents accounting management accounting information in the form of processed data collected from financial accounting, cost accounting so that it can be very useful in the management part to make appropriate decisions in management, Scientific methods, when necessary.

    Meaning of Management Accounting:

    Management Accounting is the presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities. In other words, it helps the management to perform all its functions including planning, organizing, staffing, directing and controlling.

    Definitions of Management Accounting:

    In the words of J. Batty:

    “Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”

    According to R. N. Anthony:

    “Management Accounting is concerned with accounting information that is useful to management.”

    According to ICWA of India:

    “Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.”

    According to CIMA London:

    “Management accounting is the provision of information required by management for such purposes as the formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.”

    According to the American Accounting Association:

    Management Accounting is “The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”.

    From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.

    The Objects or Functions of Management Accounting:

    The primary object of Management Accounting is to present the accounting information to the management. The Following objects are:

    Planning:

    Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash, etc., i.e., in planning a very wide range of activities of the business. Not only that, but it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the program of activities to be undertaken.

    Organizing:

    By preparing budgets and ascertaining specific cost center, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an inter-relationship grows among different parts of the enterprise.

    Motivating:

    By setting goals, planning the best and economical courses of action and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.

    Coordinate:

    It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of “Master Budget”. In this way, it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without “Budgetary Control”.

    Control:

    The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.

    Communicate:

    It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.

    Interpret Financial Information:

    It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a piece of sufficient knowledge about the subject since accounting is a highly technical subject.

    And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.

    Miscellaneous:

    • While evaluating the efficiency and effectiveness of different policies.
    • Locating uneconomic as well as the inefficient place of business activities, and.
    • Solving business problems, e.g., to expand the existing business unit or not, etc.

    Advanced Advantages of Management Accounting:

    Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.

    Advanced technique and features:

    The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in favor of the company.

    Cost transparency:

    In the corporate world, the majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures budget actions and provides cost transparency to the company.

    Flexibility and freedom:

    Management accounting systems of a flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.

    Marginal costing:

    Marginal costing is possible with the aid of the management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use scarce materials and resources. It also recommends actions based on a fixed cost, contribution, and other extras.

    The efficiency of the company:

    Companies opt for Management accounting as it increases the efficiency of the company in performing operations. It contributes to striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company as a whole.

    The bar of Profitability:

    Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.

    Simplifies the decision making in Financial Statements:

    Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, the management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.

    Enables the fluctuation of business monetary fund:

    One of the essential factors in business is the monetary fund. Management accounting enables control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.

    Assist in goal completion:

    The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.

    Future prediction from the past result:

    Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intent, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.

    Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.

    Key Advantages of Management Accounting:

    The following advantages maybe derive from Management Accounting:

    • The business activities are managing better by the application of both budgeting and planning.
    • No doubt it helps to increase the efficiency of the business.
    • Measures the actual performance in comparison with the budgets.
    • Also helps to improve the relationship between management and labor.
    • It helps the management to chalk-out future plans of action on the basis of past results.
    • Helps the management in such a way that the latter can maximize the rate of return on capital employed.

    Advanced Limitations of Management Accounting:

    The origin of management accounting can trace to overcome the limitations of financial accounting and cost accounting. Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:

    Historical Nature:

    Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control, and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.

    Technical Subject:

    Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.

    Recording of Actual Cost:

    In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.

    Incomplete Knowledge of Costs:

    In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.

    No-Provision for Cost Control:

    Costs cannot control through financial accounting as there is no provision for corrective action because of expenses being record after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.

    No-Evaluation of Business Policies and Plans:

    There is no device in financial accounting by which the actual progress can measure against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them if need be.

    Not Helpful in Decision-Making:

    As the data available is of historical nature, financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is requiring to take decisions but the information provided by financial accounting is not adequate.

    Though cost accounting came into existence to remove the limitations of financial accounting its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants. Further, most of the techniques of management accounting are also being used by the cost accountants.

    That is why; management accounting is treating as the extension of cost accounting. But for our purpose of the study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting. Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.

    Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.

    Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developing to cope with the limitations of financial accounting and cost accounting. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Management Accounting of Functions Advantages and Limitations
    Management Accounting of Functions, Advantages, and Limitations. Image Credit from #Pixabay.
  • Financial Accounting: Meaning, Nature, and Scope

    Financial Accounting: Meaning, Nature, and Scope

    Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Define with Explain it each one Concept of Financial Accounting Discuss the topic, Financial Accounting – Meaning, Definition, Nature, Scope, and Disadvantages of Limitations. Using standardized guidelines, the transactions record, summarize, and present in a financial report or financial statements such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. It also learns Accountability in Financial Management.

    Learn, Explain Financial Accounting: Meaning, Nature, Scope, and Disadvantages. 

    If a corporation’s stock is publicly traded, however, its financial statements [Hindi] (and other financial reporting) tend to widely circulate, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It’s important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.

    Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is an organization that develops accounting standards and principles. Corporations whose stock publicly trade must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. The similarity between Financial and Management Accounting.

    Meaning of Financial Accounting: 

    Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees, and government. Thus, it concerns with financial reporting and decision-making aspects of the business.

    The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be defined as,

    “The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character and interpreting the results thereof.”

    Financial Accounting:

    The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. It is commonly carrying on in the general offices of a business. It concerns with revenues, expenses, assets, and liabilities of a business house. Also, they have the two-fold objective, viz,

    • To ascertain the profitability of the business, and
    • To know the financial position of the concern.

    Nature and Scope of Financial Accounting:

    Financial accounting is a useful tool to manage and to external users such as shareholders, potential owners, creditors, customers, employees, and government. It provides information regarding the results of its operations and the financial status of the business.

    The following are the functional areas of financial accounting:-

    1] Dealing with financial transactions:

    Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.

    2] Recording of information:

    Accounting is the art of recording financial transactions of a business concern. There is a limitation on human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journal and other subsidiary books and it is useful for management in its decision-making process.

    3] Classification of Data:

    The recorded data arrange in a manner to group the transactions of similar nature at one place so that full information of these items may collect under different heads. This is done in the book called ‘Ledger’. For example, we may have accounts called ‘Salaries’, ‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of such accounts, the trial balance prepare.

    4] Making Summaries:

    The classified information of the trial balance uses to prepare a profit and loss account and balance sheet in a manner useful to the users of accounting information. As well as, the final accounts prepare to find out the operational efficiency and financial strength of the business.

    5] Analyzing:

    It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet. Also, the purpose is to identify the financial strength and weaknesses of the business. It also provides a basis for interpretation.

    6] Interpreting financial information:

    It is concerned with explaining the meaning and significance of the relationships established by the analysis. It should be useful to the users, to enable them to take correct decisions.

    7] Communicating the results:

    The profitability and financial position of the business as interpreted above communicate to the interest parties at regular intervals to assist them to make their conclusions.

    Disadvantages or Limitations of Financial Accounting:

    The concerns with the preparation of final accounts. Also, the business has become so complex that mere final accounts are not sufficient for meeting financial needs. It is like a post-mortem report. At the most, it can reveal what has happened so far, but it cannot exercise any control over the past happenings.

    The disadvantages of financial accounting are as follows:-

    1. It records only quantitative information.
    2. Records only the historical cost. The impact of future uncertainties has no place in financial accounting.
    3. It does not take into account price level changes.
    4. It provides information about the whole concern. Product-wise, process-wise, department-wise, or information of any other line of activity cannot obtain separately from financial accounting.
    5. Cost figures do not know in advance. Therefore, it is not possible to fix the price in advance. It does not provide information to increase or reduce the selling price.
    6. As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate the performance of the business.
    7. It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.
    In other words;
    1. In case of loss, whether loss can reduce or convert into profit using cost control and cost reduction? It does not answer this question.
    2. Does it not reveal which departments are performing well? Which ones are incurring losses and how much is the loss in each case?
    3. It does not provide the cost of products manufactured
    4. There are no means provided by financial accounting to reduce the wastage.
    5. Can the expenses reduce which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.
    6. It is not helpful to the management in taking strategic decisions like a replacement of assets, an introduction of new products, discontinuation of an existing line, expansion of capacity, etc.
    7. It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces reliability.
    8. It’s technical. A person not conversant with accounting has little utility of the financial accounts.

    Financial Accounting Meaning Nature and Scope

  • Explanation of Financial Statements: Objectives, Importance, and Limitations

    Explanation of Financial Statements: Objectives, Importance, and Limitations

    Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analyzed and reported. Explanation of Financial Statements: Objectives, Importance, and Limitations – Keep study and learn. This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should be disclosed, how it should be disclosed, and which financial statement should prepare.

    Financial Statements explanation of each, Meaning of Financial Statements, Objectives of Financial Statements, Importance, and Limitations of Financial Statements.

    Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can draw from these statements alone.

    However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, common-size statements, trend analysis, schedule of changes in working capital, funds flow, cash flow analysis, and ratio analysis. Related learn Financial Accounting: Meaning, Nature, and Scope!

    Meaning of Financial Statements: 

    Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which shows the financial position of a business concern in an organized manner. We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts. For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared.

    The trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in the credit column. To find out the profit earned or loss sustained by the firm during a given period and its financial position at a given point in time is one of the purposes of accounting. For achieving this objective, financial statements are prepared by the business enterprise, which includes the income statement and positional statement.

    A firm communicates to the users through financial statements and reports.  The financial statements contain summarized information on the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management.  They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
    1. Statement of financial position (or Balance sheet): Balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date.  It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
    2. Income statement (or Profit and loss account): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management.  Financial statements are prepared from the accounting records maintained by the firm.

    These two basic financial statements viz:

    (i) Income Statement,  or Trading, and Profit & Loss Account and (ii) Positional Statement, or Balance Sheet portrays the operational efficiency and solvency of any business enterprise.

    The following formula summarizes what a balance sheet shows:

    ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

    A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholder’s equity.

    The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time. So, we can also say that the last step of the accounting cycle is the preparation of financial statements.

    The income statement is another term used for Trading and Profit & Loss Account. It determines the profit earned or loss sustained by the business enterprise during a period. In the large business organization, usually one account i.e., Trading and Profit & Loss Account is prepared for knowing gross profit, operating profit, and net profit.

    On the other hand, in small size organizations, this account is divided into two parts i.e. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared. The positional statement is another term used for the Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by the Balance Sheet.

    Objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • Reliable information about changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
    • Financial information that assists in estimating the earning potential of the enterprise.
    • Other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users

    Objective and Importance:

    The profitability of Business:

    Financial statements are required to ascertain whether the enterprise is earning the adequate profit and to know whether the profits have increased or decreased as compared to the previous years so that corrective steps can be taken well in advance.

    The Solvency of the Business:

    Financial statements help to analyze the position of the business as regards to the capacity of the entity to repay its short as well as long-term liabilities.

    The Growth of the Business:

    Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion about the growth of the business. For example, an increase in sales with a simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.

    Financial Strength of Business:

    Financial statements help the entity in determining the solvency of the business and help to answer various aspects viz., whether it is capable to purchase assets from its resources and/or whether the entity can repay its outside liabilities as and when they become due.

    Making Comparison and Selection of Appropriate Policy:

    To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt the sound business policy by making Intra firm comparison.

    Forecasting and Preparing Budgets:

    The financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these shortcomings. Financial statements help the management to make the forecast and prepare budgets.

    Communicating with Different Parties:

    Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.

    Limitations of Financial Statements:

    Manipulation or Window Dressing:

    Some business enterprises resort to manipulating the information contained in the financial statements to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing.

    Use of Diverse Procedures:

    There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under the straight-line method or written down value method. However, the results provided by comparing the financial statements of such business enterprises would be misleading.

    Qualitative Aspect Ignored:

    The financial statements incorporate the information which can be expressed in monetary terms. Thus, they fail to assimilate the transactions which cannot be converted into monetary terms. For example, a conflict between the marketing manager and sales manager cannot be recorded in the books of accounts due to its non-monetary nature, but it will certainly affect the functioning of the activities adversely and consequently, the profits may suffer.

    Historical:

    Financial statements are historical as they record past events and facts. Due to continuous changes in the demand of the product, policies of the firm or government, etc, analysis based on past information does not serve any useful purpose and gives the only post­mortem report.

    Price Level Changes:

    Figures contained in financial statements do not show the effects of changes in the price level, i.e. price index in one year may differ from the price index in other years. As a result, the misleading picture may be obtained by making a comparison of figures of the past year with current year figures.

    Subjectivity & Personal Bias:

    Conclusions drawn from the analysis of figures given in financial statements depend upon the personal ability and knowledge of an analyst. For example, the term ‘Net profit’ may be interpreted by an analyst as net profit before tax, while another analyst may take it as net profit after tax.

    Lack of Regular Data/Information:

    Analysis of financial statements of a single year has limited uses. The analysis assumes importance only when compared with financial statements, relating to different years or different firm.

    Financial statements are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first step in the accounting process but they are the end products of the accounting process which give concise accounting information of the accounting period after the accounting period is over. To know the profit or loss earned by a firm, Trading, and Profit and Loss Account is prepared. Balance Sheet will portray the financial condition of the firm on a particular date.

    Explanation of Financial Statements Objectives Importance and Limitations ilearnlot
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  • What is the Source of Recruitment in the Organization?

    What is the Source of Recruitment in the Organization?

    Source of Recruitment in the Organization; The sources of employees can classify into two types, internal and external. The concept of the study Explains – the Source of Recruitment in the Organization: Internal Sources and their benefits and limitations, External Sources and their benefits and limitations. Also, Filling a job opening from within the firm has the advantages of stimulating preparation for possible transfer of promotion, increasing the general level of morale, and providing more information about job candidates through analysis of work histories within the organization.

    Understanding and Learn, What is the Source of Recruitment in the Organization?

    A job posting has several advantages. Also, From the viewpoint of the employee, it provides flexibility and greater control over career progress. For the employer, it should result in better matches of employee and job.

    Meaning and Sources of Recruitment:

    Whenever there is a vacancy in the organization, generally it is to fill. To make the candidate avail­able for filling those vacancies, their selection procedure and placement on a proper job comes under the purview of recruitment. As soon as the available vacancies know, they advertise through different media, and accordingly the applications collect for the vacant posts. Also, A group of candidates interested in doing the job and are eligible to do, it creates through recruitment.

    It is an operative function of human resource management coming under the managerial function called organizing. In the words of Edwin Flippo, ‘recruitment is the process of searching for prospective employees and stimulating them to apply for jobs in the organisation’.

    In most instances, the jobs post on notice boards, though some carry listings in the company newspapers. Also, The posting period is commonly one week, with the final decision for hiring being completed within four weeks.

    Internal applications often restrict certain employees.

    The guidelines for one company including (1) “good” or “better” on the most recent performance review; (2) dependable attendance record; (3) not under probationary sanction; and (4) having been in the present position for 1 year. Also, The present supervisor must at some time inform of his or her subordinate’s interest in another job. Some require immediate notification, while others inform only if the employee becomes a prime candidate for the listed opening. The personnel unit acts as a clearinghouse in unrealistic screening applications, preventing an excessive number of bids by a single employee, and counseling employees who are constantly unsuccessful in their attempt to change jobs.

    Inevitably, the firm must go to external sources for lower entry jobs, for expansion, and for positions whose specifications cannot be met by present personnel. Thus the firm has a number of outside sources available, among which are the following:

    Advertising:

    There is a trend toward more selective recruitment in advertising. Also, This can affect at least two ways. First, advertisements can place in media read-only by particular groups. Secondly, more information about the company, the job, and the job specification can include in the ad to permit some self-screening.

    Employment Agencies:

    Additional screening can affect the utilization of employment agencies, both public and private. Today, in contrast to their former unsavory reputation, the public employment agencies in several States well-regard, particularly in the fields of unskilled semi-skilled, and skilled operative jobs. In the technical and professional areas, however, the private agencies appear to be doing most of the work. Many private agencies tend to specialize in a particular type of worker and job, such as sales, office, executive, or engineer.

    Employee Referrals:

    Friends and relatives of present employees are also a good source from which employees may be drawn. When the labor market is very tight, large employers frequently offer their employees bonuses or prizes for any referrals that hire and stay with the company for a specific length of time. Some companies maintain a register of former employees whose record was good to contact them when there are new job openings for which they are qualified. Also, This method of recruitment, however, suffers from a serious defect that it encourages nepotism, i.e. persons of one’s community or caste employe, who may or may not be fit for the job.

    Schools, Colleges and Professional Institutions:

    Offer opportunities for recruiting their students. Also, They operate placement services where complete bio-data and other particulars of the students are available. The companies that need employees maintain contact with Guidance Counsellors of Employment Bureaus and teachers of business and vocational subjects. The prospective employers can review Credentials and interview candidates for management trainees or probationers. Whether the education sought involves a higher secondary certificate, specific vocational training, or a college background with a bachelor’s, master’s, or doctoral degree, educational institutions provide an excellent source of potential employees for entry-level positions in organizations. These general and technical/ professional institutions provide blue-collar applicants, white-collar and managerial personnel.

    Labor unions:

    Firms with closed or union shops must look to the union in their recruitment efforts. Disadvantages of a monopolistically control labor source are offset, at least particularly, by savings in recruitment costs. With one-fifth of the labor force organized into unions, organized labor constitutes an important source of personnel.

    Casual applicants:

    Unsolicited applications, both at the gate and through the mail, constitute a much-used source of personnel. These can develop through the provision of attractive employment office facilities and prompt and courteous replies to unsolicited letters.

    Professional organizations or recruiting firms or executive recruiters:

    Maintain complete information records about employed executives. These firms look upon as ‘head hunters’, ‘raiders’, and ‘pirates’ by organizations that lose personnel through their efforts. However, these same organizations may employ “executive search firms” to help them find talent. These consulting firms recommend persons of high caliber for managerial, marketing, and production engineers’ posts.

    Indoctrination seminars for colleges professors:

    Are arrange to discuss the problem of companies and employees. Professors invite to take part in these seminars. Visits to plants and banquets arrange so that the participant professors may favorably impress. Also, They may later speak well of a company and help it in getting the required personnel.

    Unconsolidated applications:

    For positions in which large numbers of candidates are not available from other sources, the companies may gain keeping files of applications received from candidates who make direct inquiries about possible vacancies on their own or may send unconsolidated applications. Also, The information may index and file for future use when there are openings in these jobs.

    Nepotism:

    The hiring of relatives will be an inevitable component of recruitment programs in family-owned firms, such a policy does not necessarily coincide with hiring based on merit, but interest and loyalty to the enterprise are offsetting advantages.

    Leasing:

    To adjust to short-term fluctuations in personnel needs, the possibility of leasing personnel by the hour or day should consider. This practice has been particularly well-developed in the office administration field. Also, The firm not only obtains well-trained and selected personnel but avoids any obligation in pensions, insurance, and other fringe benefits.

    Voluntary organizations:

    Such as private clubs, social organizations might also provide employees – handicaps, widowed or married women, old persons, retired hands, etc., in response to advertisements.

    Computer data banks:

    When a company desires a particular type of employee, job specifications and requirements are fed into a computer, where they match against the resume data stored therein. The output is a set of resumes for individuals who meet the requirements. Also, This method is very useful for identifying candidates for hard-to-fill positions which call for an unusual combination of skills.

    Sources of Recruitment:

    The eligible and suitable candidates required for a particular job are available through various sources.

    Internal Sources of Recruitment:

    1. Promotions:

    The promotion policy follows as a motivational technique for the employees who work hard and show good performance. Also, Promotion results in enhancements in pay, position, responsibility, and authority. The important requirement for the implementation of the promotion policy is that the terms, condi­tions, rules, and regulations should be well-defined.

    1. Retirements:

    The retired employees may give the extension in their service in case of the non­-availability of suitable candidates for the post.

    1. Former employees:

    Former employees who had performed well during their tenure may call back; and, higher wages and incentives can pay to them.

    1. Transfer:

    Employees may transfer from one department to another wherever the post becomes vacant.

    1. Internal advertisement:

    The existing employees may interest in taking up the vacant jobs. As they are working in the company for a long time, they know about the specification and description of the vacant job. For their benefit, the advertisement within the company circulates so that the employees will be intimated.

    Benefits of Internal Sources of Recruitment:
    • The existing employees get motivated.
    • Also, Cost saves as there is no need to give advertisements about the vacancy.
    • It builds loyalty among employees towards the organization.
    • The training cost is saved as the employees already know about the nature of the job to be performed.
    • It is a reliable and easy process.
    Limitations of Internal Sources of Recruitment:
    • Young people with the knowledge of modem technology and innovative ideas do not get the chance.
    • The performance of the existing employees may not be as efficient as before.
    • Also, The brings the morale down of employees who do not get the promotion or selected.
    • It may lead to encouragement to favoritism.
    • It may not be always in the good interest of the organization.

    External Sources of Recruitment:

    1. Press advertisement:

    A wide choice for selecting the appropriate candidate for the post is avail­able through this source. It gives publicity to the vacant posts and the details about the job in the form of the job description and job specification are made available to the public in general.

    1. Campus interviews:

    It is the best possible method for companies to select students from various educational institutions. Also, It is easy and economical. The company officials personally visit various institutes and select students eligible for a particular post through interviews. Also, Students get a good opportunity to prove themselves and get selected for a good job.

    1. Placement agencies:

    A databank of candidates is sent to organizations for their selection purpose and agencies get the commission in return.

    1. Employment exchange:

    People register themselves with government employment exchanges with their personal details. According to the needs and request of the organization, the candidates are sent for interviews.

    1. Walk in interviews:

    These interviews are declared by companies on the specific day and time and conducted for selection.

    1. E-recruitment:

    Various sites such as jobs.com, naukri.com, and monster.com are the available electronic sites on which candidates upload their resume and seek the jobs.

    1. Competitors:

    By offering better terms and conditions of service; Also, the human resource managers try to get the employees working in the competitor’s organization.

    Benefits of External Sources of Recruitment:
    • New talents get the opportunity.
    • Also, The best selection is possible as a large number of candidates apply for the job.
    • In case of unavailability of suitable candidates within the organization, it is better to select them from outside sources.
    Limitations of External Sources of Recruitment:
    • Skilled and ambitious employees may switch the job more frequently.
    • Also, It gives a sense of insecurity among the existing candidates.
    • It increases the cost as the advertisement is to be given through press and training facilities to be provided for new candidates.
    What is the Source of Recruitment in the Organization - ilearnlot
    What is the Source of Recruitment in the Organization? Image Credit to ilearnlot.com.
  • Capital Budgeting: Nature, Importance, and Limitations

    Capital Budgeting: Nature, Importance, and Limitations

    Definition and Meaning of Capital Budgeting: Economics is concerned with the allocation of scarce resources between alternative or choice uses to obtain the best purpose. The Concept of Capital Budgeting: Nature of Capital Budgeting, Importance of Capital Budgeting, and Limitations of Capital Budgeting. Capital expenditure/budgeting, on the other hand, concentrates on these allocations over time; on decisions that involve current outlays in return for expectations of future benefits, i.e., a return for an anticipated flow of future benefits. Also learned, Capital Budgeting: Nature, Importance, and Limitations!

    Learn, Explain Capital Budgeting and its Nature, Importance, and Limitations. 

    In other words, it is applied to evaluate expenditure decisions that involve current outlays but the benefits are likely to be produced in the future, i.e., over a longer period. The said benefits may be earned either in the form of the reduction in cost or the form of increased revenues. And that is why it includes addition, alteration, modification, disposition, and replacement of fixed assets.

    Nature of Capital Budgeting:

    It is the way toward settling on speculation choices in capital expenditures. Capital Expenditure may define as an expenditure for the benefits of which are expected to be received over a period exceeding one year.

    The main characteristic of capital expenditure is that the expenditure incurs or endure at one spot in time whereas the benefits of the expenditure are collected with realized at different spots in time in the future. In simple language, we may say that capital expenditure incurs or endure for acquiring or improving the fixed assets, the benefits of which expect to receive over several years in the future.

    The following are some of the examples of capital expenditure:

    • Cost of acquisition of permanent assets as land and building, plant and machinery, goodwill, etc.
    • Cost of addition, expansion, improvement, or alteration in the fixed assets.
    • Research and development project cost, etc.
    • Cost of replacement of permanent assets.

    Capital expenditure:

    Capital expenditure involves the non-flexible long-term commitment of funds. Thus, capital expenditure decisions are also called long-term investment decisions. Capital budgeting involves the planning and control of capital expenditure. It is the process of deciding whether or not to commit resources to a particular long-term project whose benefits are to realize over some time, longer than one year. Capital budgeting also knows as Investment Decision Making, Capital Expenditure Decisions, Planning Capital Expenditure, and Analysis of Capital Expenditure.

    • Charles T. Horngreen has defined capital budgeting as, “Capital budgeting is long-term planning for making and financing proposed capital outlays.”
    • According to G.C. Philippatos, “Capital budgeting is concerned with the allocation of the firm’s scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earnings from a project, with the immediate and subsequent streams of expenditures for it”.
    • Richard and Greenlaw have referred to capital budgeting as acquiring inputs with the long-run return.
    • In the words of Lynch, “Capital budgeting consists of planning development of available capital to maximize the long-term profitability of the concern.”

    Features, characteristics, symptoms, or highlights of Capital Budgeting:

    From the above description, it’s going to conclude that the important features which distinguish capital budgeting decision from the standard day to day business decisions are:

    • Capital budgeting decisions involve the exchange of current funds for the advantages to realize within the future.
    • The money or funds are invested in non-flexible and long-term activities, any funds can be investing for the long-term to get more profitable or return.
    • They have a long-term and significant effect on the profitability of the priority.
    • They involve, generally, huge funds.
    • The future benefits are expected to be realized over a series of years, and.
    • They are irreversible decisions.

    They are “strategic” investment decisions, involving large sums of cash, a serious departure from the past practices of the firm, a significant change of the firm’s expected earnings related to a high degree of risk, as compared to “tactical” investment decisions which involve a comparatively bit of funds that don’t end in a serious departure from the past practices of the firm.

    Need and Importance of Capital Budgeting:

    Capital budgeting means planning for capital assets.

    Capital budgeting decisions are vital to any organization as they include the choices as to:

    • Whether or not funds should invest in long-term projects such as setting an industry, purchase of plant and machinery, etc.
    • Analyze the offer with a proposal for expansion or creating additional efficiency.
    • To decide the replacement of permanent assets such as building and types of equipment.
    • To make the financial analysis of various proposals regarding capital investments to choose the best out of many alternative proposals.

    The importance of capital budgeting can well understand from the fact that an unsound investment decision may prove to be fatal to the very existence of the concern.

    The following the need, significance, or importance of capital budgeting arises mainly thanks to the follows below are:

    1] Large Investments:

    Capital budgeting decisions, generally, involve the large investment of funds. But the funds available with the firm always limit and the demand for funds far exceeds the resources. Hence, a firm needs to plan and control its capital expenditure.

    2] Long-term Commitment of Funds:

    Capital expenditure involves not only a large number of funds but also funds for long-term or more or less permanently. The long-term commitment of funds increase and grow the financial risk involved in the investment decision. The greater the risk involved, the greater is the need for careful planning of capital expenditure, i.e. Capital budgeting.

    3] Irreversible Nature:

    The capital expenditure decisions are irreversible. Once the decision for realization or acquiring a permanent asset takes; it becomes very difficult to dispose or determine of these assets without enduring and incurring heavy losses.

    4] Long-Term Effect on Profitability:

    Capital budgeting decisions have a long-term and significant effect on the profitability of a priority. Not only these earnings of the firm affect by the investments in capital assets but also the longer-term growth and profitability of the firm depend on the investment decision taken today. An unwise decision may prove disastrous and fatal to the very existence of the priority. Capital budgeting is of utmost importance or significance to avoid over-investment or under-investment in fixed assets.

    Difficulties of Investment Decisions:

    The long-term investment decisions are difficult to take because:

    • The decision extends to a series of years beyond the current accounting period,
    • Uncertainties of future and
    • The higher the degree of risk.
    1] National Importance:

    Investment decision though taken by individual concern is of national importance because it determines employment, economic activities, and economic process. Thus, we may say that without using capital budgeting techniques a firm may involve itself during a losing project. Proper timing of purchase, replacement, expansion, and alternation of assets is important.

    2] Importance of Capital Budgeting:

    Capital Budgeting decisions have given the first importance to financial decision-making since they’re the foremost crucial and important business decisions as they need a big impact on the profitability aspect of the firm. As the capital budgeting/expenditure decision affects the fixed assets only which are the sources of earning revenue, i.e., the profitability of the firm, special attention must give to their treatment.

    Capital budgeting decisions have established greater accentuation or emphasis due to:

    3] Capital budgeting has long-term implications:

    The most significant reason that capital budgeting decisions take is that its long-term implications, i.e. its effects will extend into the longer term, and can need to be endured for an extended period than the results of current operating expenditure. Because, a correct investment decision can yield spectacular returns, whereas a wrong investment decision can endanger the very survival of the firm.

    That is why it’s going to state that the capital budgeting decisions determine the longer-term destiny of the firm. Moreover, it also changes the danger of the complexion of the enterprise. When the typical benefits of the firm increase as a result of an investment proposal which can cause frequent fluctuations in its earnings which will become a risky situation.

    4] Capital budgeting requires a large number of funds:

    Capital investment decisions require a large number of funds which the majority of the firms cannot provide since they have scarce capital resources. As a result, investment decisions must be thoughtful, wise, and correct. Because a wrong/incorrect decision would result in losses and the same prevents the firm from earning profits from other investments as well due to the scarcity of resources.

    5] Capital budgeting is not reversible:

    Once the capital budgeting decisions take, they are not easily reversible. The rationale is that there may neither be any marketplace for such second-hand capital goods nor there’s any possibility of conversion of such capital assets into other usable assets, i.e., the sole remedy is to dispose-off an equivalent sustaining an important loss to the firm.

    They are the most difficult decisions:

    Capital investment decisions are, no doubt, the foremost significant since they’re very difficult to form. It is because their assessment depends on the future uncertain events and activities of the firm. Similarly, it is practically a difficult task to estimate the accurate future benefits and costs in terms of money as there are economic, political, and technological forces that affect the said benefits and costs.

    Capital Budgeting Nature Importance and Limitations Image
    Capital Budgeting: Nature, Importance, and Limitations, Image from Pixabay.

    Limitations of Capital Budgeting:

    Capital budgeting techniques suffer from the following limitations:

    • All the technology of capital budgeting presumes that various investment offers with proposals under opinion are mutually exclusive; which may not practically be true in some exceptional circumstances.
    • The techniques of capital budgeting require the estimation of future cash inflows and outflows. The future is always uncertain and the data collected for the future may not be exact. Obliviously the results based on wrong data may not be good.
    • There are certain factors like the morale of the employees, goodwill of the firm, etc., which cannot be correctly quantified but which otherwise substantially influence the capital decision.
    • Urgency is another limitation in the assessment of capital investment decisions.
    • Uncertainty and risk pose the biggest limitation to the technology of capital budgeting.
  • Cost Accounting: Objectives, Nature, and Scope

    Cost Accounting: Objectives, Nature, and Scope

    Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a company’s activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage. Discuss the topic, the Concept of Cost Accounting: Meaning of Cost Accounting, Definition of Cost Accounting, Objectives of Cost Accounting, Nature and Scope of Cost Accounting, and Limitations of Cost Accounting! It is mostly concern with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future. Also learned, Management Accounting; Objectives, Nature, and Scope.

    Learn, Explain Cost Accounting: Objectives, Nature, and Scope.

    Cost accounting involves the techniques for as: 1) Determining the costs of products, processes, projects, etc. to report the correct amounts on the financial statements, and 2) Assisting management in making decisions and in the planning and control of an organization.

    For example, cost accounts used to compute the unit cost of a manufacturer’s products to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieving with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

    It assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more. They had their roots in manufacturing businesses, but today it extends to service businesses.

    For example, a bank will use cost accounting to determine the cost of processing a customer’s check and/or a deposit. This, in turn, may provide management with guidance in the pricing of these services.

    Key activities include:

    • Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs.
    • Assisting the engineering and procurement departments in generating standard costs, if a company uses a standard costing system.
    • Using an allocation methodology to assign all costs except period costs to products and services and other cost objects.
    • Defining the transfer prices at which components and parts are selling from one subsidiary of a parent company to another subsidiary.
    • Examining costs incurred about activities conducted, to see if the company is using its resources effectively.
    • Highlighting any changes in the trend of various costs incurred.
    • Analyzing costs that will change as the result of a business decision.
    • Evaluating the need for capital expenditures.
    • Building a budget model that forecasts changes in costs based on expected activity levels.
    • Determining whether costs can be reduced.
    • Providing cost reports to management, so they can better operate the business.
    • Participating in the calculation of costs that will require to manufacture a new product design, and.
    • Analyzing the system of production to understand where bottlenecks are position, and how they impact the throughput generate by the entire manufacturing system.

    Meaning of Cost Accounting:

    An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. The requirements of the majority of them are satisfied using financial accounting. However, the management requires far more detailed information than what conventional financial accounting can offer.

    The focus of the management lies not in the past but on the future. For a businessman who manufactures goods or renders services, cost accounts a useful tool. It was developed on account of limitations of financial accounting and is the extension of financial accounting. The advent of the factory system gave an impetus to the development of cost accounting.

    It is a method of accounting for cost. The process of recording and accounting for all the elements of the cost calls cost accounting.

    Definition of Cost Accounting:

    The Institute of Cost and Works Accountants, London defines costing as,

    “The process of accounting for cost from the point at which expenditure incur or commit to the establishment of its ultimate relationship with cost centers and cost units. In its wider usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carry out or plan.”

    The Institute of Cost and Works Accountants, India defines cost accounting as,

    “The technique and process of ascertainment of costs. Cost accounts the process of accounting for costs, which begins with the recording of expenses or the bases on which they are calculating and ends with the preparation of statistical data.”

    To put it simply, when the accounting process is applying to the elements of costs (i.e., Materials, Labor and Other expenses), it becomes Cost Accounting.

    Objectives of Cost Accounting:

    It was born to fulfill the needs of manufacturing companies. Its a mechanism of accounting through which costs of goods or services are ascertaining and control for different purposes. It helps to ascertain the true cost of every operation, through a close watch, say, cost analysis and allocation.

    The main objectives of cost accounting are as follows:-

    1] Cost Ascertainment: 

    The main objective of cost accounts to find out the cost of product, process, job, contract, service or any unit of production. It is done through various methods and techniques.

    2] Cost Control: 

    The very basic function of cost accounts to control costs. A comparison of actual costs with standards reveals the discrepancies (Variances). The variances reveal whether the cost is within the control or not. Remedial actions are suggesting to control the costs which are not within control.

    3] Cost Reduction: 

    Cost reduction refers to the real and permanent reduction in the unit cost of goods manufactured or services rendered without affecting the use intended. It can be done with the help of techniques called budgetary control, standard costing, material control, labor control, and overheads control.

    4] Fixation of Selling Price: 

    The price of any product consists of total cost and the margin required. Cost data are useful in the determination of selling price or quotations. It provides detailed information regarding various components of cost. It also provides information in terms of fixed cost and variable costs, so that the extent of price reduction can be decided.

    5] Framing business policy: 

    It helps management in formulating business policy and decision making. Break-even analysis, cost volume profit relationships, differential costing, etc help make decisions regarding key areas of the business.

    Nature and Scope of Cost Accounting:

    Cost accounts concerned with ascertainment and control of costs. The information provided by cost-accounting to the management is helpful for cost control and cost reduction through functions of planning, decision making, and control. Initially, they confined itself to cost ascertainment and presentation of the same mainly to find out product cost.

    With the introduction of large-scale production, the scope was widened and providing information for cost control and cost reduction has assuming equal significance along with finding out the cost of production. To start with cost-accounting was apply in manufacturing activities but now it applies in service organizations, government organizations, local authorities, agricultural farms, Extractive industries and so on.

    The guide for the ascertainment of the cost of production. It discloses as profitable and unprofitable activities. They help management to eliminate unprofitable activities. It provides information for estimates and tenders. They disclose the losses occurring in the form of idle time spoilage or scrap etc. It also provides a perpetual inventory system.

    It helps to make effective control over inventory and for the preparation of interim financial statements. They help in controlling the cost of production with the help of budgetary control and standard costing. They provide data for future production policies. It discloses the relative efficiencies of different workers and for the fixation of wages to workers.

    Cost Accounting Objectives Nature and Scope
    Cost Accounting: Objectives, Nature, and Scope! #Pixabay.

    Limitations of Cost Accounting:

    The following limitations below are;

    • It is based on estimation: as cost accounting relies heavily on predetermined data, it is not reliable.
    • No uniform procedure in cost accounting: as there is no uniform procedure, with the same information different results may be arrived by different cost accounts.
    • A large number of conventions and estimate: There are several conventions and estimates in preparing cost records such as materials are issuing on an average (or) standard price, overheads are charging on the percentage basis, Therefore, the profits arrive from the cost records are not true.
    • Formalities are more: Many formalities are to be observed to obtain the benefit of cost accounting. Therefore, it does not apply to small and medium firms.
    • Expensive: Cost accounts expensive and requires reconciliation with financial records.
    • It is unnecessary: Cost accounts of recent origin and an enterprise can survive even without cost accounting.
    • Secondary data: It depends on financial statements for a lot of information. Any errors or shortcomings in that information creep into cost accounts also.
  • Management Accounting: Objectives, Nature, and Scope

    Management Accounting: Objectives, Nature, and Scope

    What is the definition of management accounting? Management accountants (also called managerial accountants) look at the events that happen in and around a business while considering the needs of the business. Management Accounting is comprising of two words “Management” and “Accounting”. Discuss the topic, Management Accounting: Meaning of Management Accounting, Definition of Management Accounting, Objectives of Management Accounting, Nature and Scope of Management Accounting, and Limitations of Management Accounting! From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately use to guide decision-making.

    Learn, Explain Management Accounting: Objectives, Nature, and Scope!

    Management Accounts a tool to assist management in achieving better planning and control over the organization. It is relevant for all kinds of an organization including a not-for-profit organization, government, or Sole Proprietorship’s. It has a significant place in the businesses and widely used by management to achieve better control and quality decision making. Also Learned, In the Hindi language: प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा, Financial Accounting!

    Meaning of Management Accounting:

    Management Accounts not a specific system of accounting. It could be any form of accounting which enables a business to conduct more effectively and efficiently. It’s largely concerned with providing economic information to managers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounts information is financial but has been organizing in a manner relating directly to the decision at hand.

    Management Accounts comprised of two words ‘Management’ and ‘Accounting’. It means the study of the managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in the formation of policy, control of execution, and appreciation of effectiveness. Management Accounts of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity.

    Definition of Management Accounting:

    Definition: It is, also called managerial accounting or cost accounting, is the process of analyzing business costs and operations to prepare the internal financial report, records, and account to aid managers’ decision making process in achieving business goals. In other words, it is the act of making sense of financial and cost data and translating that data into useful information for management and officers within an organization.

    “Management accounting is the practical science of value creation within organizations in both the private and public sectors. It combines accounting, finance, and management with the leading edge techniques needed to drive successful businesses.”

    More of it:

    Anglo-American Council on Productivity defines as:

    “The presentation of accounting information in such a way as to assist management in the creation of policy and the day to day operation of an undertaking.”

    The American Accounting Association defines as:

    “The methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”

    The Institute of Chartered Accountants of India defines as follows:

    “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting.”

    From these definitions, it is very clear that financial data is recorded, analyzed, and presented to the management in such a way that it becomes useful and helpful in planning and running business operations more systematically.

    Objectives of Management Accounting:

    The fundamental objectives of management accounting are to enable the management to maximize profits or minimize losses. The evolution of managerial accounting has given a new approach to the function of accounting.

    The main objectives of management accounting are as follows:

    Planning and policy formulation:

    Planning involves forecasting based on available information, setting goals; framing policies determining the alternative courses of action, and deciding on the program of activities. Management Accounts can help greatly in this direction. It facilitates the preparation of statements in light of past results and gives an estimation for the future.

    Interpretation process:

    Management Accounts to present financial information to the management. Financial information is technical. Therefore, it must present in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

    Assists in the Decision-making process: 

    With the help of various modern techniques management accounting makes the decision-making process more scientific. Data relating to cost, price, profit, and savings for each of the available alternatives are collected and analyzed and provides a base for making sound decisions.

    Controlling:

    It is useful for managerial control. Their tools like standard costing and budgetary control help control performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. The performance of every individual is controlled with the help of managerial accounting.

    Reporting:

    Management Accounts keeps the management fully informed about the latest position of concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

    Facilitates Organizing:

    “Return on Capital Employed” is one of the tools of Management Accounts. Since managerial accounting stresses more on Responsibility Centre’s to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it helps set up an effective and efficient organization framework.

    Facilitates Coordination of Operations:

    Management accounts provide tools for overall control and coordination of business operations. Budgets are an important means of coordination.

    Nature and Scope of Management Accounting:

    Managerial Accounting involves the furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving organizational goals. You may know is that Comparative analysis is the scope of management accounting.

    The following paragraphs discuss the nature and scope of management accounting.

    Provides accounting information: 

    Management accounting is based on accounting information. It is a service function and it provides the necessary information to different levels of management. Managerial Accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by the accounting department is used for reviewing various policy decisions.

    Cause and effect analysis: 

    The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; Managerial Accounting goes a step further. Managerial Accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payable’s, share capital, etc.

    Use of special techniques and concepts:

    It uses special techniques and concepts according to the necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

    Taking important decisions: 

    It supplies the necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taking into account.

    Achieving objectives:

    It is uses accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can take at once with the help of budgetary control and standard costing.

    No fixed norms: 

    No specific rules are followed in Managerial Accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.

    Increase in efficiency: 

    The purpose of using accounting information is to increase the efficiency of the concern. The performance appraisal will enable the management to pinpoint efficient and inefficient spots. An effort makes to take corrective measures so that efficiency improves. The constant review will make the staff cost-conscious.

    Supplies information and not the decision: 

    The management accountant is only to guide and not to supply decisions. The data is to use by the management for taking various decisions. “How is the data to utilize” will depend upon the caliber and efficiency of the management.

    Concerned with forecasting: 

    The management accounts concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan the future course of action. The information is supplied to the object to guide management in making future decisions.

    Techniques and Procedures Design and Installation:

    Management accounting is identifying with the most productive and monetary arrangement of accounting reasonable for any size and kind of embraced. Additionally, it utilizes the best utilization of mechanical and electronic gadgets. Maybe you got your answer; 10 points of Nature of Management Accounting with their scope.

    A portion of the Acts, which have their impact on management choices, are as per the following:

    The Companies Act, MRTP Act, FEMA, SEBI Regulations, and so forth.

    Inside Audit:

    This incorporates the improvement of an appropriate arrangement of inside reviews for inner control. An interior review is led by the business association with the assistance of a paid worker who has careful accounting information. All the significant records are kept up under the management accounting framework with the goal that the inner review is directed in a successful way.

    Inner Reporting:

    This incorporates the arrangement of quarterly, half-yearly, and other interval reports and pays articulations, income and assets stream explanations, scarp reports, and so on.

    Limitations of Management Accounting:

    Hence, it suffers from all the limitations of a new discipline. Some of these limitations are:

    Limitations of Accounting Records:

    Management accounting derives its information from financial accounting, cost accounting, and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the Managerial Accounting depends upon the correctness of these basic records.

    It is only a Tool: 

    Management accounts not alternate or substitute for management. It is a mere tool for management. Ultimate decisions are taking by management and not by management accounts.

    Heavy Cost of Installation: 

    The installation of the Managerial Accounting system needs a very elaborate organization. This results in heavy investment which can afford only by big concerns.

    Personal Bias: 

    The interpretation of financial information depends upon the capacity of the interpreter as one has to make a personal judgment. Personal prejudices and biases affect the objectivity of decisions.

    Psychological Resistance:

    The installation of Managerial Accounting involves the basic change in the organization set up. New rules and regulations are also required to frame which affects the number of personnel, and hence there is a possibility of resistance from some or the other.

    Evolutionary stage: 

    Management accounts only in a developmental stage. Its concepts and conventions are not as exact and established as those of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use.

    Provides only Data:

    Managerial Accounting provides data and not decisions. It only informs, not prescribes. This limitation should also keep in mind while using the techniques of management accounting.

    Broad-based Scope: 

    The scope of management accounts for wide and this creates many difficulties in the implementation process. Management requires information from both accounting as well as non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it. Also Learned, In the Hindi language: Management Accounting: Objectives, Nature, and Scope (प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा).

    Management Accounting Objectives Nature and Scope
    Management Accounting: Objectives, Nature, and Scope, Image credit from @Pixabay.

  • Controlling: Meaning, Definition, Importance, and Limitations!

    Controlling: Meaning, Definition, Importance, and Limitations!

    Controlling is one of the managerial tasks, such as planning, organizing, staffing and directing. Before studying this article Content you will learn about what is it? – 1) Meaning of Controlling, 2) Definition of Controlling, 3) Importance of Controlling, and 5) Limitations of Controlling. Also, The Importance of Directing, with Aspects or Elements! each one explains it, Controlling: Meaning, Definition, Importance, and Limitations!

    Learn, Explain each one, Controlling: Meaning, Definition, Importance, and Limitations!

    These Common questions are very asked by readers:

    • What is the Meaning of Controlling?
    • Explain the Definition of Controlling by different authors?
    • What is the Importance of Controlling?
    • How to explain the Limitations of Controlling?

    #Meaning of Controlling:

    Controlling is an important function of management which all the managers are required to perform. In order to contribute towards the achievement of organizational objectives, a manager is required to exercise effective control over the activities of his subordinates.

    Thus, control can define as a managerial function to ensure that activities in an organization are performed according to the plans. Control also ensures the efficient and effective use of organizational resources for achieving the goals. Hence, it is a goal-oriented function.

    Often, controlling and management control are considering the same. However, there is a vast difference between the two. Control is one of the managerial functions while management control can define as a process which managers follow to perform the control function. Management control refers to the set of predetermined standards, comparing actual performance with these standards and, if required, taking corrective actions to ensure the achievement of organizational goals.

    #Definition of Controlling:

    The following definitions below are;

    According to Koontz And O’Donnell as;

    “Managerial control implies the measurement of accomplishment against the standard and the correction of deviations to assure attainment of objectives according to plans.”

    According to Dale Henning as;

    “Control is the process of bringing about conformity of performance with planned action.”

    Controlling function is performing in all types of organizations whether commercial or non-commercial and at all levels i.e. top, middle and supervisory levels of management. Thus, it is a pervasive function. Control should not be considered as the last function of the management.

    The controlling function compares the actual performance with predetermined standards, finds out deviation and attempts to take corrective measures. Eventually, this process helps in the formulation of future plans too. Thus, the control function helps in bringing the management cycle back to planning.

    #Importance of Controlling:

    The importance of the controlling function in an organization is as follows:

    Accomplishing Organisational Goals:

    Control helps in comparing the actual performance with the predetermined standards, finding out deviation and taking corrective measures to ensure that the activities are performing according to plans. Thus, it helps in achieving organizational goals.

    Judging Accuracy of Standards:

    An efficient control system helps in judging the accuracy of standards. It further helps in reviewing & revising the standards according to the changes in the organization and the environment.

    Making Efficient Use of Resources:

    Control checks the working of employees at each and every stage of operations. Hence, it ensures effective and efficient use of all resources in an organization with minimum wastage or spoilage.

    Improving Employee Motivation:

    Employees know the standards against which their performance will judge. Systematic evaluation of performance and consequent rewards in the form of increment, bonus, promotion, etc. motivate the employees to put in their best efforts.

    Ensuring Order and Discipline:

    Control ensures a close check on the activities of the employees. Hence, it helps in reducing the dishonest behavior of the employees and in creating order and discipline in an organization.

    Facilitating Coordination in Action:

    Control helps in providing a common direction to all the activities of different departments and efforts of individuals for attaining the organizational objectives.

    Controlling Meaning Definition Importance and Limitations
    Controlling: Meaning, Definition, Importance, and Limitations! #Pixabay.

    #Limitations of Controlling:

    The defects or limitations of controlling are as following:

    Difficulty in Setting Quantitative Standards:

    It becomes very difficult to compare the actual performance with the predetermined standards if these standards are not expressing in quantitative terms. This is especially so in areas of job satisfaction, human behavior, and employee morale.

    No Control on External Factors:

    An organization fails to have control of external factors like technological changes, competition, government policies, changes in the taste of consumers, etc.

    Resistance from Employees:

    Often employees resist the control systems since they consider them as curbs on their freedom. For example, surveillance through closed-circuit television (CCTV).

    Costly Affair:

    Control involves a lot of expenditure, time and effort, thus it is a costly affair. Managers are required to ensure that the cost involved in installing and operating a control system should not be more than the benefits expected from it. Similar Content of Articles: Direction: Meaning, Definition, Nature, and Importance!

  • What are the Features of Controlling Functions?

    What are the Features of Controlling Functions?

    Features of Controlling Functions; Controlling is the last function of the management process which is performed after planning, organizing, staffing and directing. On the other hand, management control means the process to be adopted in order to complete the function of controlling.

    Here are explain; What are the Features of Controlling Functions?

    Following are the characteristics of controlling functions of management

    • Controlling is an end function: A function which comes once the performances are made in-Conformities with plans.
    • It is a pervasive function: which means it is performed by managers at all levels and in all type of concerns.
    • Controlling is forward-looking: because effective control is not possible without past being controlled. Control always look to the future so that follow-up can make whenever to require.
    • Controlling is a dynamic process: since controlling requires taking reviewal methods, changes have to be made wherever possible.
    • It is related to planning: Planning and Controlling are two inseparable functions of management. Without planning, controlling is a meaningless exercise and without controlling, planning is useless. Planning presupposes controlling and controlling succeeds in planning.

    Controlling has got two basic Process of Controlling:

    • It facilitates coordination.
    • It helps with planning.

    Also, know about; What is Controlling?

    Controlling consists of verifying whether everything occurs in conformities with the plans adopted, instructions issued and principles established. Control ensures that there is effective and efficient utilization of organizational resources so as to achieve the planned goals. Controlling measures the deviation of actual performance from the standard performance discovers the causes of such deviations and helps in taking corrective actions.

    What are the Features of Controlling Functions
    What are the Features of Controlling Functions? #Pixabay.

    Lets reading Definitions about Controlling; According to Brech,

    “Controlling is a systematic exercise which is called as a process of checking actual performance against the standards or plans with a view to ensuring adequate progress and also recording such experience as is gained as a contribution to possible future needs.”

    According to Donnell,

    “Just as a navigator continually takes reading to ensure whether he is relative to a planned action, so should a business manager continually take reading to assure himself that his enterprise is on the right course.”

    According to Henry Fayol,

    “Control consists of verifying whether everything occurs in conformity with the plan adopted, the instructions issued, and the principles”.

    Important Features of Controlling:

    Features of controlling could describe in the following analytical manner:

    • The unique feature of controlling, and.
    • Other features of controlling.

    Now, explain each;

    Unique Feature of Controlling:

    The unique feature of control is that it is the “central-tendency point” in the performance of managerial functions i.e. a point where all other managerial functions come together and unite with one another. This is so because, while contemplating corrective action, sometimes it might be necessary to modify plans or effect changes in the organizational setting. At some other times, changes in the staffing procedures and practices might be thought fit by management for remedial reasons.

    While at some junctures, management might plan to effect changes in the directing techniques of leadership, supervision or motivation, to bring performance on the right track. That is to say, that the remedial action comprised in the controlling process might embrace one or more managerial functions. Hence, controlling is designated as the central tendency point, in management theory.

    Other Features of Controlling:

    Some important basic features of controlling could state as under;

    • Controlling makes for a bridge between the standards of performance and their realistic attainment.
    • Planning is the basis of controlling; in as much as, the standards of performance are laid down in plans.
    • Controlling is a pervasive management exercise. All managers, at different levels in the management hierarchy, perform this function, in relation to the work done by subordinates under their charge-ship.
    • As controlling is the last managerial function, it is true to assert that it gives a finishing or final touch to the managerial job, at a particular point of time.
    • Controlling is based on information feedback i.e. on the reports on actual performance done by operators. In specific terms, it could say that information is the guide to controlling; as without information feedback made available to management, analysis of the causes of deviations and undertaking remedial action are not possible.
    • Action is the soul of controlling. In fact, controlling would be a futile activity; if after analyzing deviations – suitable remedial action is not undertaking by management, to bring performance, in conformity with plan standards.
    • Controlling is a continuous managerial exercise. It has to undertake on a regular and continuous basis, throughout the currency of the organizational operational life.

    Significances of Controlling:

    The significances of the controlling function in an organization are as follows:

    • Accomplishing Organisational Goals: Controlling helps in comparing the actual performance with the predetermined standards, finding out deviation and taking corrective measures to ensure that the activities are performing according to plans. Thus, it helps in achieving organizational goals.
    • Judging Accuracy of Standards: An efficient control system helps in judging the accuracy of standards. It further helps in reviewing & revising the standards according to the changes in the organization and the environment.
    • Improving Employee Motivation: Employees know the standards against which their performance will be judged. Systematic evaluation of performance and consequent rewards in the form of increment, bonus, promotion, etc. motivate the employees to put in their best efforts.

    Boundaries of Controlling:

    The defects or boundaries of controlling are as following:

    • Difficulty in Setting Quantitative Standards: It becomes very difficult to compare the actual performance with the predetermined standards if these standards are not expressing in quantitative terms. This is especially so in areas of job satisfaction, human behavior and employee morale.
    • No Control on External Factors: An organization fails to have control of external factors like technological changes, competition, government policies, changes in the taste of consumers, etc.
    • Resistance from Employees: Often employees resist the control systems since they consider them as curbs on their freedom. For example, surveillance through CCTV (closed-circuit television).